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VALUE INVESTING
Slimma: Small Cap Value?

By Stephen Bland (TMFPyad)
December 1, 2000

A micro cap this time, and in the risky sector of ladies clothing manufacture, for those two reasons this is one purely for those who like to live very dangerously. But it is very cheap. In fact Slimma (LSE: SLM) is a pyad share in all but market cap.

Here are the usual fundamentals on Slimma (www.slimma.co.uk)

  • Share price 26p
  • High/low this year 41/22
  • High/low last five years 74/15
  • Market capitalisation £2.7m
  • Normalised earnings per share (EPS) year ended 30/09/99 4.5p
  • Lowest forecast EPS yar ending 30/09/00 5.4p; 2001 6.8p
  • P/E ratio historical 5.8; on 2000 forecast 4.8; on 2001 forecast 3.8
  • Yield on historical dividend 6.2%; on 2000 forecast dividend 9.2%
  • Price/Tangible Book 0.8
  • Net cash 4%
  • One year relative strength -6.0% (i.e. negative)
  • Directors own 19.4%, other majors 54.5%
  • Note that there is only one broker forecasting, and that this forecast was made some time ago, in May 2000. This broker is also the house broker.

Slimma's full year results for the year ended 30 September 2000 are due to be released in a couple of weeks. For anyone interested it might be worth waiting. The interim figures for the six months to 31 March 2000 showed an increase in EPS to 2.1p, against 1.4p for the comparable period in the previous year.

With those interim figures published in May 2000, the directorspeak said:
"With the continuing support of our current customer base, we believe that our strong and focused management team, in combination with our competitive and well balanced manufacturing supports, will continue to achieve progress."

In English, I interpret this as suggesting that the rising EPS shown by the interims should continue.

Slimma manufactures ladies outerwear for other companies to sell, in the main: it has customers such as mail order companies and various retail outlets. As far as I can establish it is not much involved in retailing itself, apart from a couple of factory outlets near its Leek, Staffs. base.

A rag trade company then, and as such immediately attracting a higher risk than some other industries in my view, for fairly obvious reasons of fashion and an extremely high level of competition. I am not certain, but I cannot find any indication that the company is a supplier to Marks & Spencer (LSE:MKS).

Its recent history is erratic. EPS rose strongly in 96 and 97 to hit 6.4p, then fell back in 98 to show a loss of 0.4p. Somebody did something right, in what is a notoriously difficult business, because in 1999 the company pulled itself back up to generate 4.5p. If the 2000 forecast of 5.4p proves to be accurate, then a further rise of 20% will result.

During most of the last five years, the company had net borrowings. It was in the 1999 figures that this turned round into net cash.

Tangible book value per share over the last five years has remained in the range 33-39p approximately, and in 1999 was 34.8p.

Also, remaining with the asset theme, in 1999 the company had net current assets of £2.3m, not far short of its market capitalisation of £2.7m.

Small Cap Warning

I personally do not go in for small caps, my lower limit being £100m, although I might occasionally drop this a bit for a good share.

I have written often about the problems of small caps, even though they might otherwise appear to be perfect value plays. For newcomers, here are my reasons:

  • Lack of investor interest, especially among institutions.
  • Lack of broker forecasts.
  • Lower director integrity in respect of comment on likely trends etc.
  • Spreads will be much higher.
  • Generally higher business risk associated with being a smaller company.

On the other hand some investors actually prefer small caps, believing them to have more potential for gain. That may be true, but for me, because I am interested essentially in placing a large amount in one share, minimising the downside is a cardinal feature of my style and small caps just have more downside than big caps, other things being equal.

I speak from experience here. What happens often with small cap value plays is that the share does everything you want, yet nobody is interested and consequently the price hardly moves.

Anyway, for those that are willing to play small caps, Slimma may have attractions. But be careful, very careful. Personally I don't particularly like this industry at all.

Where Next?